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The Economizing Problem

The Economizing Problem . Human economic wants are unlimited Resources are scarce All economics depends directly on these two facts/assumptions Economics is about doing the best with what we have

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The Economizing Problem

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  1. The Economizing Problem • Human economic wants are unlimited • Resources are scarce • All economics depends directly on these two facts/assumptions • Economics is about doing the best with what we have • it’s about using resources in the most efficient manner possible to create the most “stuff” to fulfill wants

  2. Resources – Factors of Production • Types of resources: • Land • All natural resources (“gifts of nature”) Minerals, forests, arable land, oil, etc. • Income from Land = Rent • Capital: human/physical • machinery, factories, storage facilities, transportation • Income from capital = Interest • Labor • All physical and mental talents of individuals • Income from Labor = Wages • Entrepreneurship • Initiative, Management, Innovation, Risk-taking • Income from Entrepreneurship = Profit/Loss

  3. Economic Systems • An economic system is a particular set of institutional arrangements and mechanisms that respond to the economizing problem • The market system -- “capitalism” • The command system -- “communism”

  4. The two economic sectors • Households - Consumers individuals in their private lives acting as consumers and producers • Business – Firms - Producers firms seeking to maximize their profit by purchasing productive resources

  5. The Market Economy and the Circular Flow Model • Virtually all major economies work through some version of the market economic system • In this system, there are a number of different aspects to the market • a market to buy and sell resources • a market to buy and sell products • businesses • households

  6. Building the Circular Flow Model - Step 1 RESOURCE FACTOR MARKET BUSINESSES HOUSEHOLDS PRODUCT MARKET

  7. Building the Circular Flow Model - Step 2 RESOURCE FACTOR MARKET RESOURCES INPUTS BUSINESSES HOUSEHOLDS PRODUCT MARKET

  8. Building the Circular Flow Model - Step 3 COSTS INCOMES RESOURCE MARKET RESOURCES INPUTS BUSINESSES HOUSEHOLDS GOODS & SERVICES GOODS & SERVICES PRODUCT MARKET

  9. Building the Circular Flow Model - Step 4 COSTS INCOMES RESOURCE MARKET RESOURCES INPUTS BUSINESSES HOUSEHOLDS GOODS & SERVICES GOODS & SERVICES PRODUCT MARKET

  10. Building the Circular Flow Model - Step 5 COSTS INCOMES RESOURCE MARKET RESOURCES INPUTS BUSINESSES HOUSEHOLDS GOODS & SERVICES GOODS & SERVICES PRODUCT MARKET REVENUE Profit from goods and services PAYMENT Goods+Services

  11. Factor Market Money for wages, rent, profit, interest Capital, land, labor, entrepreneurship BUSINESSES HOUSEHOLDS Goods and Services Money PAYMENT for Goods +Services Product Market

  12. How can An Economy become more productive??? • Specialization • Takes place when people, businesses, regions, and even countries concentrate on goods and services that they can produce better than anyone else

  13. Division of Labor • the breaking down of a job into separate, smaller, tasks, which are performed by different workers.

  14. Assembly Line-A manufacturing process in which interchangeable parts are added to a product to create an end product • Technological Advances • Robotics: machines perform physical tasks • Invention: new goods and services • Innovation: Improving a good or service • Automation: machines control production

  15. Labor/Workers • -Blue-collar workers: working class employee who perform manual/unskilled labor • Ex: factory worker • -White-collar workers: perform tasks that require less physical labor. Skilled workers oftentimes are more highly paid than blue-collar workers. Ex: doctors, lawyers, administrators • -Pink-collar workers: workers who work in the charitable sector Ex: Susan G. Koman • -Green-collar workers: workers who work in the environmental sector Ex:

  16. Economic decision making requires people to consider all the costs and benefits of a decision • Fixed Costs • -Costs or expenses that are the same no matter how many units of a good are produced • Ex: mortgage payments, rent • Salary [ie the manager]

  17. Variable Costs • -Costs or expenses that change with the number of products produced • Ex: wages, raw materials, electricity bills, water bills • -These costs increase when production increases and decrease when production decreases

  18. Total Costs • -Fixed Costs + Variable costs= Total costs

  19. Economizing problem Utility Economic resources Land Capital Investment Labor Entrepreneurial ability Factors of production Full employment Full production Productive efficiency Allocative efficiency Consumer goods Capital goods Production possibilities table Production possibilities curve Opportunity cost Law of increasing opportunity costs Economic growth Economic system Market system Command system Resource market Product market Circular flow model Key Terms and Concepts

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